Sterilization of Money Inflows : Difficult (Calvo) or Easy (Reisen)?

Author/Editor:

Jeffrey A. Frankel

Publication Date:

December 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Some countries undergoing exchange-rate-based stabilization and financial liberalization in Latin America, Asia and elsewhere have faced large capital inflows since 1991. Many have tried to sterilize the reserve inflows. Calvo, Leiderman, and Reinhart argue essentially that sterilization is more difficult than generally realized, due to the interest costs on sterilization bonds. Reisen argues essentially that sterilization is easier than generally believed. This paper reviews the issues in the simplest textbook model and concludes that local interest rates are not likely to rise if the source of the disturbance is an exogenous capital inflow, but will rise if the disturbance is an increase in money demand or an increase in exports.

Series:

Working Paper No. 94/159

English

Publication Date:

December 1, 1994

ISBN/ISSN:

9781451857627/1018-5941

Stock No:

WPIEA1591994

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

38

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